Odfjell Drilling Ltd. (ODL) Earnings Call Transcript & Summary

Good afternoon, everybody, and welcome to the Odfjell Drilling Q1 2026 Results Presentation Webcast. My name is James Crothers, and I'm the Investor Relations Officer of the company. I am joined today by our Chief Executive Officer, Kjetil Gjersdal; and our Chief Financial Officer, Orjan Lunde. Before we begin, your attention is brought to the important information slide of our presentation, which we'd encourage participants to read in full. Note that this presentation is only a summary of the quarter and the more comprehensive quarterly reports should be read separately. Both that report and today's presentations are available on our website, www.odfjelldrilling.com. Today's call will follow the traditional structure with Kjetil taking us through the key highlights before moving on to our operational review. Kjetil will then continue with an overview of the market as we see it today before handing over to Orjan, who will go through our financial review. Kjetil will then summarize the presentation before we open up our Q&A session for analysts and investors. [Operator Instructions] With that, I will pass over to our CEO, Kjetil Gjersdal. Kjetil?

Thank you, James, and a very good afternoon, everybody. Today, we are reporting what are excellent financial results driven by a really strong operational performance across our fleet. Due to this performance, we generated a particularly strong bonus contribution, which contributed to a total EBITDA of $154 million from revenue of $284 million. In addition, we have further increased our dividend whilst continuing to deleverage our balance sheet. Q1's dividends will now be $0.25, increasing from $0.23 per share. Now this is the sixth quarter in a row that we have increased our dividend, and this highlights the capability of our fleet to generate significant cash flow. Our leverage ratio is also further reduced to 1.6x net debt to EBITDA, whilst equity ratio has increased to 55%. Further to this, we remain very comfortable about our contract backlog with our total backlog now sitting at $2.3 billion, $2 billion of which is firm. As we look at new opportunities to add backlog, we believe that the harsh environment market remains very tight and in particular for high-spec semisubmersibles in Norway and increasingly also in other regions. And finally, as many of you will know already, post period, we experienced an equipment handling incident on Deepsea Atlantic, which resulted in the BOP and riser being dropped to the sea floor and some damage to the rig. As announced, thankfully, the incident did not result in any injury to personnel or cause any impact on the environment. However, it has resulted on the Atlantic being taken off hire. Now this is an unprecedented incident for our company. And if we move to Slide #7, I will dive into some more details. It is of no surprise to you that we are taking this extremely serious. As soon as the incident occurred and personnel, the rig and the local environment were confirmed to be safe, my senior management team and I made sure that we were taking all steps possible to bring the rig back to full strength. Our team is now completely focused on meeting this challenge head on. Within hours of the incident occurring, we have structured multiple teams to work in parallel on progressing different solutions to bring the back -- to bring the rig back on hire. Since the incident, we have made good progress in addressing and understanding the challenge ahead of us. We have located the BOP, and we have started to work on recovering it. Our primary focus is on the safe repair of the damaged equipment, compliance to regulatory authorities and cooperating closely with clients and vendors. Investigation as to the cause of the incidents are ongoing and together with our equipment manufacturers, we will be sure to implement measures and learnings that are developed as a result. In addition to this, we are also progressing other work streams. That includes that we have pushed the button on getting our spare BOP that we have in stock ready as a plan B. This is in case we are not successful with the recovery or repairs with the primary BOP. Another alternative is a combination of these options. And given the possible scenarios we are considering, we believe it will take 3 to 4 months in total before Deepsea Atlantic is ready for operation again. And having the spare BOP ready as an alternative is included in that estimate and is part of derisking the total timeline. Now as we move ahead, there can be further findings that improves that estimate, and there can be findings that makes it worse. It remains too early to conclusively state the total financial impact of the incidents. However, with the information that we have in hand, the 3 to 4 months is an estimate that we believe in. It is worth noting that the company has insurance in place, which covers replacement or the repair of the damaged equipment, including some operating cost covers during the process, which we are working closely with our insurers to progress. As was stated in my quote in our press release today, this incident really has been a reminder to us all that unforeseen events can happen in our industry. Despite that, I am very pleased with the response of my team, our clients and the wider industry to the situation. In addition, I want to give credit to my fantastic colleagues -- for those who follow Odfjell Drilling, you know that I'm blessed with a highly competent and motivated team who are working day and night on this subject now. And I have full confidence that we together will resolve this challenge in the best possible manner. Then moving on to the rest of the operational review. And despite what's happened with the Deepsea Atlantic, it's worth noting that Q1 actually was a very strong operational quarter for our business. All of our units were active in Norway and achieved a financial utilization of 96%. In addition, during Q1, our units performed ahead of expectations and delivered very strong bonuses, further bolstering our EBITDA generation for the quarter. In addition to what we achieved in Q1, it's worth bearing in mind what we have ahead of us. Currently, we retain over $2 billion of firm backlog coverage with $300 million of priced options. This backlog means that all of our units have firm contract coverage until at least mid-2027, whereafter, our units are priced and unpriced options which extend into 2030 for some units. Then we take a look at our market review. And last quarter, we noted that we believe that the market was becoming tighter, and we maintain this view. Globally, there has been no meaningful changes to supply. And from a Norwegian contracting perspective, most units, which could work in our core area are either fully contracted, overseas or in need of significant investments to allow them to operate in the NCS. And we see no reason that this should change in the near future with operational entry barriers into the NCS remaining very high. From a demand perspective, we have also seen continued messages from our client on their intent on arresting production declines by drilling more wells than current levels. Furthermore, we believe that demand will continue to be focused on securing Tier 1 sixth-generation harsh environment rigs. In other regions, we see outstanding tenders for work in Namibia and in the U.K. and have seen a notable increase in interest among clients for deepwater drilling, which could further reduce competitive supply. There is further incremental short-term exploration work also available with longer-term developments likely to be maturing around '27, '28, in line with our own fleet availability. And in summary, I would say that we feel the market is very well balanced between supply and demand and positions our fleet very well for contracting for the future. And with that, I will now hand it to you, Orjan, to go through our financial review.

Thank you, Kjetil. I will start with a summary of the income statement. Our revenues continues to benefit from higher day rates as well as including the first full quarter of earnings after the acquisition of Deepsea Bergen. Operating revenue in Q1 '26 was $284 million compared to $204 million in Q1 '25. Operating revenue from our own fleet was $254 million, while the external fleet generated revenue of $30 million. The reduction in revenue from the external fleet compared to previous quarters is explained by the transition of Deepsea Bergen from the external fleet to the own fleet segment. Q1 EBITDA for the owned fleet segment was $150 million, representing a margin of 59%, which is partly supported by a solid achievement of performance incentives in the quarter. The EBITDA for the external fleet segment was $6 million, which is a margin of 20%. Less corporate overhead and other adjustments, the group EBITDA was $154 million. The company delivered a net profit of $73 million in Q1. Before I talk about our robust balance sheet on Page 13, I would like to mention that on 17th of April, we got a positive court ruling from Gulating Court of Appeal in the Odfjell offshore tax case. The Norwegian tax authorities have the right to appeal within 1 month from the ruling. Then to the balance sheet development and status. Our net debt is decreasing. Following the increase in debt level in Q4 '25 related to the acquisition of Deepsea Bergen, during Q1 reduced our net debt by $25 million down to $883 million, which corresponds to a leverage ratio of 1.6. The equity ratio is marginally up to 55% out of total assets of approximately $2.6 billion. The available liquidity is $295 million, including undrawn RCF of $227 million. Details of the cash flow for Q1 follows on the next slide. In Q1 2026, we generated $123 million in cash from operations, reflective of a negative change in working capital of $27 million during the quarter. The change in working capital is partly explained by the acquisition of Deepsea Bergen, higher day rates on the other units and mainly by changes in payment terms related to personnel taxes and social security implemented through changes in Norwegian law effective from 1st of January 2026. Net interest paid was $20 million, which reflects a longer first interest period on parts of our loans due to the refinancing in early December last year. Tax paid was $8 million. Cash flow from investing activities was minus $14 million, where our $4 million was related to periodic maintenance. The remaining $10 million was purchases of fixed assets, where $5 million were client-specific upgrades covered by lump sum payments from customers in this or adjacent quarters. Net cash flow from financing activities was $61 million, including minor FX adjustments. We used our revolving credit facilities to actively manage our liquidity to reduce interest costs, which resulted in making net repayments of $52 million on the RCF during the quarter. In addition, we made $12 million in scheduled installments on our bank facilities and leases. Dividends paid in Q1 were $55 million and was related to Q4 results. Finally, on the back of the strong financial results in the first quarter of '26, a robust balance sheet and cash flow position, we are continuing our upward dividend trajectory by declaring a dividend for Q1 of $0.25 per share, which translates to a total dividend payment of $60 million for the quarter. This corresponds to an annualized yield of 9.5% based on yesterday's close. The shares will trade ex dividends on 27th of May and payment will be made on or around. I will now pass back to Kjetil, who will summarize our presentation.

Thanks, Orjan. So in summary, Q1 saw Odfjell Drilling delivering excellent financial results following a fantastic operational performance during this quarter. Our market continues to be tight, positioning our fleet well for the years ahead when our fleet comes up contracts. Our cash flow generation is well secured due to our strong backlog. And finally, given our market position, our backlog, our results and our strong balance sheet, we are very pleased to once again increase our dividend for the sixth time in a row. In our annual report for several years now, I have always said that our focus is operations, operations, operations. And as we move ahead, this focus will not change. This is an important period to get right. As a team, we are confident that we will get the Deepsea Atlantic back in operation in the best possible way. Thank you very much. [Operator Instructions] Our operator today is Francois. Francois, can you please open the telephone lines and open the Q&A session.

[Operator Instructions] We've got a question from Fredrik Stene from Clarksons Securities.

First, congratulations on a very strong operational quarter. You always seem to outperformed by around 5%. Hope I'll catch up to that at some point. But my question today relates to the Deepsea Atlantic and the incident in April. First, I appreciate you guys giving some guidance and information and update today. I think that's helpful even though you're kind of in a state where you don't know everything just yet. It's important for everyone to get kind of a glimpse into the process and how you're working through this. And Kjetil, I think you said -- or you said that the best estimate for now is somewhere between 3 and 4 months base or from the time of the incident. But you also said that it may happen sooner and it may happen later depending on how things develop. So I was wondering, are you able to share a bit of light on which events or long lead items or anything that is kind of key to getting this process done. So what needs to change in a way? Is it going to be faster? And what can potentially make it take longer than your initial estimates? So any color on that would be super helpful.

Yes. Obviously, this is a complicated challenge, Fredrik, with a lot of variable factors, both technical lead times, et cetera, regulatory authorities involved and so on. We have taken all of that into account and giving our estimate based on the information that we have, and it is what we see as a likely outcome and something that we believe in. Obviously, we're very happy that we were able to line up the spare BOP as part of that time estimate, which, as I said, I think, derisk the case a lot. Obviously, there will be further findings we find on the primary BOP that might help improve the situation, but it's too early to conclude. I hope you understand, Fredrik, to go into a detailed discussion or explanation about what could go -- help us go better and what could help us take longer. That's all we can spend time on that here.

That's totally understandable. Just wanted to get like a high-level view. And then my second question as a follow-up. Are you able to give some color on how discussions have been with the client around this? I would assume that they are also keen on getting the rig back to work as soon as possible. There aren't any really replacement rigs out there. And I would expect that kind of disregarding this particular event that they've been happy with the performance of the Atlantic. So I would assume that they're keen to get it back and drilling again.

Yes, yes, absolutely. And I want to give credit to both [ Iberia ] and Equinor in this process. We have an excellent cooperation and have received fantastic support so far. And all parties are focusing on bringing the rig back in operation as soon as possible. And yes, that's so far that's been very, very good.

All right. And then just one quick one to Orjan. The ruling from Gulating, can you just remind us what that would mean in dollars in case you -- in case that ends up being the final ruling?

We have disclosed a Norwegian krona amount, NOK 307 million that is sitting on our balance sheet as a receivable right now. So if we move forward with a potential positive outcome of the case, those NOK 307 million would be paid to us in addition to some cost coverage and interest during the period.

There are no further questions from frontline. So handing over to you, James, to take questions from webcast.

Sure. Thank you very much, Francois. Thank you for your questions so far. So we have one question here in regards to marketing opportunities. Is there enough expected demand in Norway to keep your entire owned fleet busy in Norway without having to ship them overseas and go internationally with those units?

Yes, we think there is. When we sort of do a bottom-up calculations of the opportunities that lie ahead of us, we see a very strong market, and we see a market imbalance or even perhaps lacking a few rates. So yes, that is definitely a possibility that we can keep them all in Norway. But it's also interesting alternatives elsewhere, both in the U.K. and other places. So we are watching that one closely as well.

Great. A few questions on M&A as well. So any plans to make acquisitions of more of the rigs Odfjell Drilling of?

Yes. I have to admit, M&A is not on my top of my agenda is. I have other things to think about. But yes, I will stick to what we've said. We did what is now Deepsea Bergen. I think if you can find the right quality assets with the right price and with the right backlog, we're definitely interested in pursuing those opportunities.

Great. We've had a few questions as well in regards to how we plan to progress our dividends. Orjan, do you want to talk about how we see that?

Yes. As always, we don't provide guidance on our dividend strategy. So I would like to refer to our dividend criteria, which are outlined on Slide 16, but it ultimately remains discretionary from quarter to quarter.

Great. One question here in regards to supply of rigs in our sector. Kjetil, how do you sort of see there's some rigs in other yards which are maybe finishing building, I don't know, how do you sort of see supply for rigs in our sector developing?

Well, I think supply is definitely tightening up, and this -- it's easy to have a good overview of what sort of excess or additional supply that could be entering the market. But I think sort of the -- either they are far away from here or there is a lot of work that needs to be done with them. So there was one contract announcement with Transocean Barnes coming back working for Var Energy. And I think, of course, we have the Mira in Namibia, which is a candidate. Other candidates, we evaluate that will take a lot longer time to be sort of candidates for entering the market. So [indiscernible] it a market very much in balance, but also good demand and supply that tightens up.

We've received -- I can see we've received quite a lot of questions on, obviously, the Atlantic incidents. I think it's worth reiterating the comments, we would reiterate the comments we've made in our reports and presentations are there. In general, we will update the market as appropriate and any material developments as the progress at this point. Obviously, it's hard for us to be too specific as our reports and presentation suggests. One question here, though, I think that is worth clarifying is does the spare BOP in Atlantic meet the operator's requirements? If I recall correctly, it was replaced due to request for the operator. I think it's just worth talking about the spare BOP in our system and how -- where that's from and what that is.

Yes. So the spare BOP is the BOP that we took off the Deepsea Aberdeen when it did its SPS. So on almost all terms, it meets the requirements that is very similar to the BOP that's actually on Atlantic. It will require some modifications, but we have a full overview of that, and we have sort of implemented those modifications into the plan, which sort of adds up to the 3 to 4 months that we say. So I would say it's almost fully identical, but we will need some modifications, particularly on the control system.

Great. Thank you. Again, a few more questions in regards to the cause of the incident, which we obviously can't go into at this point as we're still doing our investigations. Any learnings that we have from those investigations would obviously be implemented on to the rigs to prevent similar scenarios. I think we'll have one more question. Do we have -- we've had a question if we have any comments on legacy Awilco rigs coming into the market? We can't cover that already.

I don't have any comments to that. You should just talk to [ Rico ] about that.

Great. I think then in that case, we will close the call for now. And if there are any further questions, anyone does come, please do get in touch. As I said, we've had -- I can see a few questions that have come through on the conference call, and I'll endeavor to contact you directly in regards to those questions as well. Again, really appreciate everyone's continued interest in the company, and we look forward to speaking again in our Q2 results in August. Thank you very much.